SA’s whale-sized public sector wage bill approaches a cliff

Nearly 70% of SA's public sector workers are unionised, which explains how they were able to achieve a 22% premium over private sector workers during wage negotiations. Picture: Moneyweb

SA’s public sector wage bill now swallows nearly 35% of the budget and 14% of GDP. Not only is this way out of line with other emerging economies, it is extreme by virtually any measure – including developed economies.

Source: OECD

Wage negotiations currently underway between government and public servants appear to be making progress, having kicked off last year with threats of strikes and protests unless wage demands of 10% to 12% were met.

SA’s roughly 2.7 million public sector workers and government appear to be finding a middle ground, suggesting wage increases for 2018 are likely to come in at around consumer inflation plus 1% to 3%.

A percentage point here or there may seem trifling, but not when you are talking about a wage bill of around R140 billion a year. An increase of inflation plus 1% over three years translates into a shortfall of about R12 billion by 2021 at the national level, and around R13 billion at the provincial level.

Treasury’s Medium-Term Budget published late last year showed public sector wages increased at 10.3% a year since 2009, considerably above the rate of inflation. What was also alarming about the budget was the disclosure that up to 70% of some provinces’ health budgets go to wages.

Source: OECD

Economists and ratings agencies have been sounding the alarm over the ballooning public sector wage bill for years. Government is attempting to shave the headcount by leaving non-critical vacancies in some departments unfilled, but this is not enough. Last year, Mike Schussler, the chief economist at Economists.co.za, warned that SA could no longer afford a bloated civil service, and that the only way out was a massive private sector job creation drive. But that would require government to abandon policies that stood in the way of investment and job growth.

One of the key figures being monitored in the upcoming budget on February 21 is the size of allocation to public sector wages. Adrian Saville, CEO of Cannon Asset Managers, argues that the government wage bill is already at an unsustainable level and any hike will only exacerbate the problem.

“The public sector wage bill in South Africa is, by any measure – be it by SA history or by global measures – at the far end of the spectrum. Whether we are being compared to similar-sized economies, emerging markets, or even advanced economies that tend to have high levels of current spending, the wage bill as a percentage of government spending is one of the highest in the world and is creeping steadily higher,” says Saville.

Source: OECD

Though wages are being spent in the right sectors, such as public education and national healthcare, the results being achieved are dismal, as evidenced by South Africa’s ranking in these arenas in global tables. Adds Saville: “There is no governance and no accountability in respect of the spend. There is no link to outcomes, productivity, or effectiveness and there are no checks and balances in place. This perpetuates a system in which spending continues to rise without regard for impact or effectiveness.

“These wage demands come at a particularly difficult time for the fiscus. State-owned enterprises (SOEs) desperately need further financial injections, but they are seeking funding from a government that is already running an unsustainably large deficit with a growing debt pool. Worse, the return on assets at SOEs stands at around 2% per annum, but this is being funded at a cost to government of 8.5% per annum.”

Another development being keenly studied in the upcoming budget is government’s promise of free tertiary education, which could add another R50 billion to the budget alongside the already announced revenue shortfall of R50 billion, due to overspending and weak revenue growth resulting from the stalled economy.

A study entitled Demographic, employment, and wage trends in South Africa by UNU-WIDER, the Brookings Institution and the Development Policy Research Unit (DPRU) at the University of Cape Town, claims unionised public sector workers have become the new “labour elite”. While non-agricultural private sector employment has been shrinking as a proportion of the total labour force, public sector employment grew to 2.69 million from 2.16 million workers between 2008 and 2014. Nearly 70% of public sector workers are unionised, which helps explain how they were able to achieve a 22% premium over private sector workers at the wage negotiating table.

The OECD’s 2017 Economic Survey of South Africa notes that the public sector wage bill at 35.3% of the budget, and interest on debt at 10%, limits government’s room for fiscal manoeuvre. Despite a freeze on public sector employment in 2015 and 2016, the OECD says further efforts could be made to limit annual wage increases by reallocating workers to areas where they are more needed, such as health and education.

The only long-term approach to stem the growth in the public sector is to implement policies that promote job creation. The OECD recommends much stronger investment in infrastructure and education. That’s been promised for years, but never materialised. Implementing some of the plans the government has in the pipeline – such as minimum wages, national health insurance and free tertiary education – will further stall any hope of a strong economic rebound.

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COMMENTS 18

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In order to calculate the actual cost of the public sector to the tax payer, one must of course also factor in the cost of having to hire consultants or external agencies to do the actual work – SASSA being an example.

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23

The first is structure related. At the bottom you have many short steps, Once you get to junior management, the difference between your salary and the next step is a full 100k. From 600k to 1.2m there is a gap of around 3 levels.

The second problem is an abundance of the first problem. Too many managers in the upper 500k plus stairwell.

The remuneration of one Chief Director is equivalent to a fully staffed unit in a branch up to junior management.

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16

The percentages public sector wages per budget and per GDP compared to other countries are scary. But I would also like to see, if possible, figures showing the (comparative) added value delivered for these wages. How many are paid to be seat-warmers?

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19

That is the crux of the matter. It is one thing to spend so much on govt wages, but i would wager that the metric you are talking about, i.e value for money spent, would easily be the worst in the whole world.

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12

The public sector wage bill is 35% of the budget. The unemployed rate sits at 33% with 17 million people collecting welfare in SA. These are numbers that should keep anyone awake at night, including our new esteemed leader!

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29

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5

The article indicates a wage bill of R140 billion per year or 35% of budget.
35% of budget is considerably more than R140 billion. The Treasury budget review of 2017 indicates a wage bill of R550 billion.

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10

If the wage bill was only R140 billion we’d all be smiling(about R52k per annum per civil servant).The R550 billion equates to about R204k per annum.That’s about 35% of the budget.They’re earning more than the private sector and they still want inflation plus 3% with more benefits.It’s totally unsustainable!

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18

Another cost is the money that we private citizens don’t spend in the economy due to the fact that we pay for private services as the government offered services that we do pay for anyway are so bad. Private schools, security services, medical aids, general tax.

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15

next time you come across a team of municipal workers on the road , plse take note :
1 max 2 out of a team of 10 are actually working
1 is looking for firewood , 1 is out looking
for cheeken , 2 are making the fire.
the biggest and fattest are fast asleep in the shade he he he Amandla!

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24

Mate, making barely disguised racist comments does not help the debate at all. If I were a black person your comment would have clouded out all the valid points that are made in the article and I would just walk away feeling slighted and angry.

I really despair when I read comment sections. Another article on Moneyweb had a comment that implied that black people are inherently stupid.

The underlying anger of the emerging black middle class is starting to make sense to me now.

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4

Whale-sized wage bill for whale-sized incompetence. Now that could be what economic freedom is all about. Or is the next step to get the whale-sized wages without having to work at all. Economic freedom at last.

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4

Repatriating the stolen billions from the Zuptas might help in the short term. Performance based salaries are the only way forward in the long term – this country needs to be run like a business not a charity.